Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

Rating:
Summary: Unbelievable expose'
Review: This is an incredible book documenting what white collar crime can do to society. The executive members of Enron and Arthur Andersen and V Elkins should all be under the jail.
They knew what they were doing and rationalized their decisions based on greed and ego.
If they were so smart, why could they not do the right thing?
This book should be required reading for any business major and perhaps a college course.
Read it and weep. It is a sorry testimonial to all that can and often does go wrong with the world of business.

Rating:
Summary: turning a dog into a duck...
Review: It is by now a cliché that arrogance and myopia contribute to many a downfall, whether the downfall is personal or corporate. This book proves that point aptly. Hubris and a sincere belief that Enron could do no wrong in the world contributed to an atmosphere of injudicious superiority. Combine that tumultuous atmosphere with ineffective, weak-willed executives and poor business management skills, Enron always was a precarious edifice awaiting its fate.

At least, such is the narrative that the authors offer. They argue that Enron, over the past 15 years, repeatedly found itself in financial trouble, and, rather than come clean to the Street, used financial engineering strategies to make its numbers appear better than they were. This practice arose out of a fanatical devotion to the company's stock price; the company's stock price would not continue to rise if the company missed the Street's earnings expectations for the quarter. Since so much of the executives' wealth was tied up in Enron stock and options, financial shenanigans became a self-fulfilling prophecy. After all, the authors point out, if most of your wealth is tied up in a company's stock, don't you have an incentive to do everything possible to keep its stock at a high level? Certainly, at this point, financial chicanery becomes more attractive than financial fidelity.

Therein lies the fundamental flaw of Enron (as well as numerous other bubble companies): the very compensation scheme created by the company to inculcate a sense of loyalty in its executives created a conflict too gross to manage adequately. The conflict in this instance is, in retrospect, a simple one: executives had all the incentive in the world to keep their company stock at a high level because all of their wealth, and their future wealth, was tied up in the company. Therefore, there was little incentive for them to be straightforward with the Street, or, for that matter, the company's finances. Enron thus became a delusional place where it could do no wrong and its managers were businesspeople par excellence.

All of this is false of course. Enron's managers are human after all, and all humans are susceptible to the foibles and follies of people everywhere; no matter how smart a group of executives, nor the sterling reputations of the schools from which they received their MBAs, absent sound business principles, ignorance becomes bliss and delusion becomes reality.

The authors are at their best when they explain the source of Enron's executives' arrogance, and the consequences for the company of that arrogance. It is important, therefore, to understand the company's hierarchy. The company was run by its founder, Ken Lay. Despite having the title of CEO, he played a role more akin to Chairman of the Board or a statesman: he spent most of his time away from the company, hobnobbing with celebrities and heads of state, and otherwise embodying the rock star CEO mentality. Business is just another form of theater, a la Sean Penn walking down the red carpet at the Oscars. Thus, other executives, from Jeff Skilling, on down, basically ran the show, and their outsized, narcissistic personalities therefore dictated a lot about the Enron culture.

Skilling came from McKinsey, the famous consulting firm full of Harvard and Wharton MBAs. As we all know, people with MBAs from Harvard and Wharton can be very intelligent. But they can also be very arrogant and dismissive of those they consider to be their intellectual inferiors; the authors imply that Skilling demonstrated the worst tendencies of a Harvard MBA, and, absent any checks in his behavior, his arrogance and condescension became the shaky cornerstones of the poorly constructed edifice that became Enron.

The metaphor of a poorly built structure is, at the end, the appropriate one for Enron. Despite the thousands of worker bees carrying out the daily operations of the company, the executives at the top were maniacally focused only on telling the Enron story: manipulating the Street into thinking that Enron was the greatest thing since sliced bread. Their thought was that as long as the stock keeps going up, and the Street believes in the Enron story, then there is no need to make the hard business decisions that are actually quite unpleasant to deal with. Enron had no organization and no comprehension of the risks it faced, either in its daily operations or in its financial engineering. One need not be an architect or engineer to know that structural integrity is important to the sanctity of a building. Such is the lesson we learn from the Enron fiasco: image is nothing when it is created only for the purpose of supplicating the Street and propping up the stock.

Incidentally, the title of this review comes from a reference in the book. The authors quote an accountant who explains that Enron used creative accounting techniques that often hewed to the letter of the law but violated its spirit. Under this logic, if you have a dog, but you paint its fur yellow and paste a beak on it, you technically have a duck, if by "duck" you understand it to mean "an animal with yellow fur (feathers) and a beak." In other words, if a transaction meets the technical requirements for it to be considered, say, revenue, then it need not matter that, in substance, it's not really revenue but debt.

Rating:
Summary: Interesting History Lesson
Review: Even if you do not have exceptional math skills, this is a good read. The book goes through the various accounting manipulations that Enron created. However, the strong points of the book are how it follows the company's main players during its rise during the nineties, and its ultimate fall by 2001. Anyone who works in management, or close to it in the corporate environment will probably recognize some of these same accounting manipulations in there own company. The problem with Enron is that these manipulations became the most prominent source of revenue as the economy changed and bad deals caught up w/them. That anyone actually acts surprised by what Enron did is truly amazing when it was so blatantly out in the open. Enron's enablers, Arthur Anderson, Merill Lynch, the SEC, all assisted Enron w/ making its fall a lot more spectacular than it had to be if simple rules, laws, weren't arrogantly ignored. This book vividly displays these players and has you almost rooting for their fall at the end, if not for their conceit, than for the entertainment provided when an arrogant giant goes down.

Rating:
Summary: good summer read, gripping story, reasonable overview
Review: I found this book gripping (although tedious at times) -- it focusses mostly on Enron's business practices through the early and late nineties culminating in its bankruptcy declaration. It tells the story as viewed from within Enron executives' lives/timelines and provides a high level overview of perhaps most of the significant events that occurred within the corporation. For most Americans, Enron burst into our consciousness post 9/11 -- in a wave of dot-com meltdowns and corporate scandals. Most of us probably still do not understand what energy trading is, and as time passes, will care even less that the principals will go unpunished, or that the enormous loss of shareholder equity and trust will merit nary a whisper of change in Republican controlled business-friendly environments. What a shame!

The book presents a good picture of the executives involved -- Ken Lay -- detached; Jeff Skilling -- missionary but blind to reality; Andy Fastow -- uber self-interested geek/criminal; among a whole cast of characters. Corporate boards would do well to study the personal dynamics and corruption exhibited within these pages to prevent repeats.

Structurally though, it was disappointing to me that the authors spend so many pages discussing the history, but not enough time on certain details or the epilogue. There are a lot of pages enumerating the various deals and shenanigans, but not much detail with respect to what actually they contained or did -- perhaps, as the authors say, the deals were so complicated that not many people understand them even now (including the authors?). It was also disappointing not to read any guidance or at least conventional wisdom in terms of what we need to do structurally to restore the system of balances and trust (i.e. what do we really need to change in the realationships between corporate boards and executives, auditors, analysts/investment banks, the SEC, the DOJ, investment rating agencies etc.). Perhaps we need to wait for a follow on.

Rating:
Summary: Packed with Knowledge!
Review: Enron is, of course, old news by now. The company went bankrupt in 2001, and its spectacular collapse was merely the first of a series of notorious corporate scandals. Most of the story Bethany McLean and Peter Elkind tell in their book has already appeared in newspaper and magazine accounts and in other, rush-to-publish books that hit the market during or shortly after the events described. However, these authors have assembled what may be the single most comprehensive, detailed account and written it like an anecdote-rich, lively business-based novel. We do wish they had included a timeline and a list of sources, since they have had the benefit of being able to draw on all of that other work, on indictments and on testimony before courts and Congress, but their account is engrossing and complete. If you read just one book on the Enron scandal, we believe this may be the book to read.

Rating:
Summary: Political manipulate for financial gain
Review: Tim Belden was not the typical Enron Trader. He had a master from Berkeley and worked as a researcher at the Lawrence Berkeley Laboratory. Some considered him possessing "Pure Thought" about the free markets, a true supply and demand advocate. Did Belden greed cloud his better judgement and wisdom?

Belden was a leader of a group of hyper aggressive West Cost electricity traders. Enron acquired Portland General to gain access to the electricity market. Belden believed in the beauty of the free market and had no problem exploiting the inefficiencies. The exploitations lead to serious legal charges.

In 1999, Deregulation of California's energy market provided enormous opportunities for energy traders. Lay and Skilling touted deregulation benefits and claimed potential savings of $8.9 billion for California.

Three investor owned utilities - Pacific Gas & Electric, San Diego Gas & Electric, and Southern California Edison all had long term contracts too purchase at high rates. Politicians wanted guarantees that the consumer would get their rates fixed.

This mean the burden of price increases could not be passed on too the customer. If prices climbed and prices were fixed for the consumer the losses from the price increases would be carried by the utility company and lead them into forced insolvency. Furthermore, the immature nature of the new power service markets provided no hedge capability against such uncertainty in the power prices. These companies would drown in debt. In the Summer of 2001, the weight of the higher price drown Pacific Gas & Electric as it filed for bankruptcy.

Deregulation forced utility companies to purchase power in the spot market every day forbidding long term contracts that could have guaranteed proce. The idea was to create panic and force a rate drop. The drop in rates would return money to the cities. Politically, it made sense

The California Public Utilities Commission predicted a 10 percent drop in rates. At first prices seemed to drop and deregulation was a smash with wholesale cost averaging $33 a megawatt hour. Breaking the long term contracts allowed cities to pool up reserves as lower costs gave them a profitable margin.

In 1998, CPUC was surprise to see reserve power which usually cost a dollar spike to $2,500 per megawatt then to $5,500 and four days later to $9,999 a megawatt hour. Dynegy simply offered to supply standby power at that price. Nothing was forbidding the companies from bidding to infinity.

California created two quasi-governmental agencies: the California Power Exchange whose job was to set hourly prices for electricity through auctions conducted on the previous day and on the day of delivery; the second agency called the Independent System Operator whose job was too manage the states transmission lines to ensure reliability.

If deregulation failed in California, it would harm Enron and the economics of supply and demand encouraged internal criticism of the insufficient number of power plants resulting from politics, power being bought out from California and then resold back, and abusive manipulations of the market to create profitable margins. Enron did not think CPUC rules made economic sense and on more then one occassion attempted to education by experiment.

If Enron failed in California, it would find it difficult to convince other states to use their power services - electricity and gas brokerage. It would seem Enron best course would be to cooperate and make the system work, instead Enron decides to go against the system. Enron decides too "game" the system, believing it is their job as Enron traders too make money and not benefit the state.

The results: ISO experienced 17 emergencies combining 1998 and 1998, 55 emergencies in 2000, and 70 in 2001. Prices reached a stagger $750 a megawatt. The ISO response was to cap the price at $250 a megawatt. In May, Enron's Belden and his West Coast Trading group booked $200 million. It seemed Enron was manipulating the markets too their own benefit (Fat Boy, Ricochet, Death Star, and Get Shorty). Was it a game to the Enron traders?

Why so much maintenance? Companies like Mirant, Dynegy, and Reliant took power plants off line for maintenance. By Nov nearly 25 percent of the state energy capacity was idle for maintenance. From May 2000 to June 2001 major plants only ran at 50 percent capacity. Was there really a scaracity?

Legal problems suddenly surfaced, charges of: fraud, fraud involving markets, and fictitious commodity transactions. FERC lacked subpoena power. FERC concluded there was insufficient data to "support findings of specific exercises of market power." In 2001, FERC initiated price caps of $92 a megawatt across the western market. The tactic seemed to work and prices dropped to $43 a megawatt. During the crisis California had paid $40 billion for electricity. Abuse was determined to fall on the companies that sold California its power with prices ending up seven times more expensive from a prior year. By 2000, when Belden had closed his books the West Coast power group had booked $460 million in profits. Overall, Enron's North American trading desk had made a staggering $2.2 billion for the year. Eventually, the FERC would bring hard evidence against Enron and shut down all their gas and electricity trading privileges.


Rating:
Summary: How the Train Was Wrecked -- The Inside Story
Review: This is one terrific piece of reporting by two talented journalists. McLean and Elkind tell the inside story of Enron's improbable rise and astonishing fall. One measure of their talent is that they paint vivid portraits of all of the principal players at Enron, Jeffrey Skilling, Kenneth Lay, Rebecca Mark, Amanda Martin, Andrew Fastow, Lou Pai, and Clifford Baxter. McLean and Elkind describe in telling detail what made each of these men and women tick: their backgrounds, their goals, their triumphs and their failures. And in doing so, they answer a fundamental question: who were the people who made Enron rise (or appear to rise) so fast and crash so hard? Not surprisingly, there are few sympathetic characters in this book, which, given its overarching themes of greed, arrogance and ultimate tragedy, has a novelistic cast, particularly as the authors recount Enron's final and doomed year.

But the book is far more than simply a collection of character sketches of some sleazy and dishonest strivers: it also lays out in depth, but always with lucidity, exactly how Enron carried out its brazen swindles, how it consistently misled Wall Street and its investors about the true weakness of its business, and how it hid its debt through accounting frauds and the use of phony SPEs. One of the book's strengths is how it explains in patient detail just how these many scams operated, on a level that was rarely, if ever, captured in daily journalism.

The authors also explain the development of Enron's culture, the oversized role played by its macho traders who ultimately ripped off California for millions, Andy Fastow's role as enabler to the rest of the crooks as he put together the dozens of phony deals that kept the company awash in borrowed funds (and made him staggeringly wealthy), Ken Lay's hands-off management style, the deal-making at any cost mentality that gripped Enron, and the disdain for execution once deals were completed. The book also shows how Enron intimidated its banks, accountants and lawyers into repeatedly doing its bidding when all of them should have known better.

For anybody who wonders what went wrong at Enron, and by extension in American business in the late 20th century, this is as good an explanation as there is. The only pity is that the narrative stops with Enron's chapter 11 filing. Doubtless the myriad indictments, guilty pleas and the chapter 11 case would have provided even more fascinating reading.