The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron by Bethany McLean and Peter Elkind
also video documenatry of the same name
This is dense reading if you’re not a CPA or MBA, I think, but I’m trying to understand. Basically it’s the story of the rise and fall of Enron Corp., which over several years grew to a multibillion-dollar business by gaming the financial markets and accounting standards. They’d do things like create paper corporations to move debt to so their balance sheet read better. Their CFO, who created these entities, then paid himself millions to administer them. They did this chicanery and worse for years, with the collusion of their board of directors, their accounting firm (Arthur Andersen), their banks (CSFB, J. P. Morgan, Merrill Lynch) and Wall Street (including analysts permanently wearing rose-colored glasses). Everyone was thrilled until it became evident that the Emperor was getting chilly, and it was revealed for a huge, complex Ponzi scheme.
I had been wanting to read this anyway, but in light of the latest economic meltdown and the revelations of the Bernie Madoff Ponzi scheme, it’s relevant today. And before Enron, there was the dot.com meltdown of the late 90s, and before that was the S&L meltdown of the early 90s.
Update 7 May 09: I finally finished reading this last night. It’s sort of too bad the authors/publisher decided to get it to press before all the lawsuits and convictions. So they had to stop writing around summer 2003. But I suppose they wanted to get the story out there before competing books were printed. Besides, they probably realized that the lawsuits could drag on for years, be appealed, etc. Long story short, check Wikipedia for the sentences for Fastow and Skilling, and the sort of surprising death of Ken Lay.
I would like to put some very pungent quotes from the last chapter here. Paraphrasing one: the SEC put some stronger corporate disclosure rules in place; to which the authors remark “investors will see how well those work during the next bull market.” Well, there was a bull market later in the ’00s and I guess we’ve all seen, in 2008, how well the financial system worked. A breathtaking bull market was followed by a breathtaking collapse.
The thing the authors really focused on in the last chapter was the fact that no one took any responsibility for the problems. The Enron people said that all their financial structures and transactions were vetted by Arthur Andersen and their lawyers; those people said that it wasn’t their job to determine the ultimate viability of Enron’s baroque vehicles. The upper echelon all claimed to be victims of a aggressive regulators and prosecutors, and they did nothing except be innovative and hard working. The analysts who were the cheerleaders for buying Enron stock claimed they were lied to. A couple upper-level executives did plea bargains, but basically because they didn’t want to go to jail. There were a few contrarians and naysayers who early on believed that Enron’s financials and business model were the chimerae (hey! that’s a cool word) that they really were weren’t really listened to, until chinks began to appear in the rosy picture around 2000 – 2001.
The whole thing is sordid and depressing beyond belief. And somewhere in the world, it’s all happening again to be revealed in a few years.
Update 9 May 2009: I finally finished the book since I needed to return it to the library. A little more on the last chapter. The authors don’t do much moralizing but they do seem a little nonplused that the entire cast of characters did absolutely no apologizing or soul searching. They really seemed to believe they were righteous.
To paraphrase the authors’ words: “To accept their arguments is to believe that telling the truth is the same as making sure no one can prove you’re lying.”
Update 13 May 2009
I did get hold of the documentary DVD. This was very well done, for a story that’s hard to tell in pictures. It gave a very good outline of the hubris and arrogance that fueled Enron’s rise, and made pretty clear the collusion of the bankers, accountants, stock analysts and government neglect that helped make it possible. I would have liked to see a little more on Andy Fastow’s byzantine SPE’s that he brazenly operated with the OK of the Enron board, their accountants, lawyers and bankers. The DVD went into proportionally a little more detail on Enron’s part in the California “energy crisis.” Large amount of excellent extras on the disc. Unfortunately it went to press before Skilling and Fastow’s sentencing and before the unexpected death of “Reverend” Ken Lay.
It was almost humorous to hear the congressperson state that part of the motivation for the hearings was “so this didn’t happen again.” Déjà vu much?
Anyway, I’m glad I read the book and saw the film.
