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on June 12, 2004
I chose the above title quote from "Butch Cassidy and the Sundance Kid" to highlight my review. The authors provide a biography of many of the Enron players that lets us know what these guys were all about at their core. For example, Jeff Skilling spent almost all his after-school time working at a television station. Yet, he went to college without a dime because he blew all his pay in the stock market-buying stocks on margin. Never mind though because he got an impressive academic scholarship anyway because of his "brilliance." The authors provide other telling stories about the other major players. Ken Lay, the Baptist preacher's boy who preached exemplary corporate values, had an affair with his secretary, and later divorced his first wife to marry her. Yes, this is the same lady who went on television complaining about being broke while her family still owned millions of dollars in real estate. Lay's number two guy-not Skilling-who shacked up with a different Ken Lay secretary at Enron, costing himself annointment as Lay's successor. By the way, this guy now is a billionaire. Having that affair with Lay's secretary, later marrying her, was the smartest thing he ever did because he left Enron to found his own high-flying energy company. Rebecca Mark got a leg up from another Enron mentor by having a tempestous affair with him. The stories like this go on and on.
The authors provide far more detail about company history and the accounting conspiracies that brought it down. As a professional accountant, I am even more convinced now that Arthur Andersen deserved to fail for approving many of the tricks that Enron used to book fictitious profits. The authors point out that near the end, nearly 85% of Enron's total debt wasn't on their books, but "lay" in off balance sheet special purpose entities. The auditors couldn't understand the meaning of the standard sentence in an audit report that states that the financial statements "present fairly the financial condition and operations of Enron in accordance with generally accepted accounting principles." They over emphasized generally accepted accounting principles and ignored the term "present fairly." Good riddance to them.
The authors certainly are not admirers of Skilling, Fastow, or most of the other Enron players. For example they say of Skilling in their Epilogue, "He does not seem to have any remorse about his own actions, any sense that he hired the wrong people, got into the wrong businesses, or emphasized the wrong values. The fault, in his view, lies in a world that did not and will not appreciate the sheer newness of what Enron was trying to do." At the end, Jesse Jackson-yes that Jesse-held prayer meetings in the hall to comfort the afflicted who suddenly realized they needed forgiveness. Skilling didn't attend. I hope Jesse says a few prayers to protect Jeff while he's in prison. He'll need them, as well as a lifetime supply of "soap on a rope."
Certain Enron principals flew to their bankruptcy hearing in their mega-bucks Gulfstream 5 executive jet and stayed at the plush Four Seasons in Manhattan. As one of the offending executives said, "Maybe we should have flown on Southwest and stayed at the Ramada." In short, yes.
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on May 24, 2004
Excellent journalism and very well articulated research from McLean and Elkind make this a gripping read for anyone who wants to understand the forces that drive corporate greed. Banks, rating agencies, lawyers and accountants are not spared in what is a scathing criticism of profitability over ethics and plain common sense. What disapponted me, however, was the authors' obvious decision to skim over the political elements of the whole scandal. Kenneth Lay was one of the single largest individual contributors to the Bush campaign in 2000 and also made available corporate resources, such as company jets, on numerous occasions. Dick Cheney had secret meetings with company executives at a time that the wheels were beginning to fall off and it is impossible to believe that this was all innocuous, although in the rare instances that the authors refer to such events, they will have you believe that this was the case. Time will hopefully still reveal more about the murky political dealings of Enron, but it is a crying shame that this otherwise very well written book is not a place where you will learn anything at all about that dimension, despite there being no shortage of facts to be found elsewhere in the public domain.
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on December 18, 2003
The authors have done a masterful job of describing the critical mass of complicated personalities that contributed to the Enron meltdown. McLean and Elkind are keenly perceptive about human nature at its worst, and paint colorful portraits of the personalities of Enron's top honchos. The behavior of Enron executives jockeying for position at the expense of their corporation is infuriating.
Ripping off the investors is bad enough, but some of the executives cannibalized their own company with Wall Street's help. Financial engineering may have assisted these people, but their willingness to do it in the first place is a question of character. McLean and Elkind do a masterful job of implying the contributing elements of lack of character. This is a well written and fascinating book. This is not so much a book about finance as it is a book about human behavior in a social crucible where power and high rewards are at stake. This book will become a classic in business school ethics courses and organizational behavior courses.
"Collateralized Debt Obligations and Structured Finance" by Tavakoli will become the textbook of choice for any graduate school developing a course in this subject. It's clever in explaining structured finance including Enron's disguised loans. The author gives reasons why investment banks and sureties who aided Enron had their own failings in how they distributed internal social rewards. It's a structured finance text that warns against and suggests defenses to this kind of behavior and starts out saying that one should expect fraud and be prepared to diffuse it.
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on November 8, 2003
For anyone interested in the Enron scandal and what actually happened, this book is a must read. As noted, McLean and Elkind are excellent journalists who also had the benefit of good editing. Despite the arcane nature of some of the issues, it reads well.
The shortfall: It is difficult to criticize but the book focusses almost exclusively on Enron, the key Enron players and Arthur Andersen. It ignores and glosses over the roles played by "the enablers", the major commercial banks plus several of the investment banks. Also missing from the notorious "enablers" is McKinsey and Co. which worked closely with Skilling (a McKinsey alumnus) to create the framework for the fraud ...did they create the fraud, but they "enabled" the fraud. And yet when one learns that McKinsey people were present and in fact, sat-in on Enron board meetings, one can argue they were as clueless as the board. Let's grade the quality of their work: A+ for intellect; C- for smarts!
In fact, if McLean and Elkind had cast their net a little wider they could have written an even more compelling narrative of Enron and not only what happened, but why it happened. As one finishes the book, in the distance one can still hear the dull whine of the Andersen shredders at work.
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on November 5, 2003
This book gets to the heart of the matter of Enron. It tells you enough about the people to understand the corporate culture and the personal motivations. Enron was a mix of things that just continued to spiral. It's all about money, of course. Even the people who weren't so caught up in the meltdown, who left, were in it for the money. At some level it reaches a point of absurdity. As Lew Black demands, "What were these people going to do, start their own space program?"
But this is a remarkable book. There were various personalities. Many were out of the conservative Midwest traditions. I can't draw any real conclusions as to why they could throw this all overboard, but all these people get into a mode where they work hard, very hard, but that's about all that they retain of traditional values. They don't see their work in a broad context or relate it to any community but themselves. It's a terrible, corrosive process that eats away at them.
There's an internal mystery about these people. What did they really want? Who were they trying to impress? How did they come to give their souls to the notion of meeting earnings expectation on Wall Street, and thereby cashing out their options? How did all other measures of corporate performance get abandoned? And this isn't just Enron. Enron took things to the limit, but they played within the rules. The Wall Street rules.
What we got from this period was worthless stock, excess power capacity, severe economic dislocation in California, and so on. Basically, greed wasn't good, and it didn't motivate people to do good things. But these were incredibly flawed people in an incredibly flawed system. The government looks almost as bad as the corporations. All the people were flawed. If they were hard driving and street smart, they survived Enron because they got out early. So they knew how long to milk the cow, but that's about all you can say, at least measuring their nobility. The bad people are truly bad. Their basic assumptions are bad. Their values are, well, silly. Being clever is important, to the point of atomic self-destruction. Others were motivated by status. On the surface, Lay was a man devoted to charity, but it was a thin gloss of altruism on a truly corrupt core.
This is a sad book because these people were successful and often came up through the obvious path to success, the big schools. What do these schools do to produce people who are a little more rounded? It's hard to believe that any corporation with a structure and culture like Enron can be kept on track. Did the recent reforms really do anything to prevent future Enrons? If the corporate structure of Enron had been more traditional, it would have been restrained. If the people had a more balanced view of personal and social responsibility, it never would have happened. If the regulators had maintained control, it might have been clipped. If accountants had imposed normal discipline on the company, the worst abuses would not have happened. But on and on, down the line, nothing curbed the excess. So what level of reform is required?
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This book will be especially valuable to those who have a keen interest in "the amazing rise and scandalous fall of Enron." I also commend to their attention Smith and Emshwiller's 24 Hours: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America. The "smartest guys in the room" included Kenneth Lay, Jeffrey Skilling, Rebecca Mark, Andrew Fastow, Kenneth Rice, and Clifford Baxter. Whereas Smith and Emshwiller explored the same company as investigative reporters, McLean and Elkind seem (to me) to have approached their subject as corporate anthropologists. Both books reach many of the same conclusions as to what happened...and why.
Two significant differences are that Smith and Emshwiller limit their attention primarily to a period in 2002 extending from October 16th (when Enron announced huge losses caused by two partnerships) to December 3rd (when Enron filed for Chapter 11 bankruptcy); McLean and Elkind cover a two-year period of the company's "amazing rise and scandalous fall." Also, McLean and Elkind devote far more attention to each of the "smartest guys"; Smith and Emshwiller seem far less interested in them, except in terms of the impact of their mismanagement and corruption. Let's say there are two books about the collapse of the twin towers at the World Trade Center; one focuses on the human tragedies associated with it whereas a second book addresses design, construction, and structural issues. Obviously, both approaches are valid.
McLean and Elkind suggest that the eventual collapse of Enron was caused less by the greed of senior-level Enron executives than it was by their arrogance and incompetence. Their lack of basic business acumen is astonishing as is their defiance of regulatory agencies and contempt for customers. None of them seems to have had a moral "compass." They exemplified, indeed nourished a culture of brutal competition between and among their subordinates. Each used Enron as a personal ATM as well as a means by which to structure all manner of corporate partnerships and high risk/high yield investments without fear of any personal liability. If one prospered, so did they. If it failed, the loss was Enron's. On to another.
Primary blame for all this must be shared by Lay, Skilling, and Fastow. McLean and Elkind rigorously examine the inadequacies of each, suggesting that if only one of the three had not been involved, it is probable that Enron would not have had the problems it did. Attorneys, accountants, brokers (notably Merrill Lynch) and bankers (especially Citibank and JP Morgan Chase) apparently were aware of Enron's bending and then breaking of various laws but were earning so much in fees that they chose to remain at the Enron "trough" side-by-side with Lay, Skilling, Fastow, and other Enron executives.
Consider this brief excerpt from Chapter 10 (page 149):
Here's how another former employee explains the process: "Say you have a dog, but you need to create a duck on the financial statements. Fortunately there are specific accounting rules for what constitutes a duck: yellow feet, white covering, orange beak. So you take the dog and paint its feet yellow and its fur white and you paste an orange plastic beak on its nose, and then you say to your accountants, 'This is a duck! Don't you agree that it's a duck?' And the accountants say, 'Yes, according to the rules, this is a duck.' Everybody knows that it's a dog, not a duck, but that doesn't matter, because you've met the rules for calling it a duck."
There are so many other brief, equally revealing excerpts which I am tempted to include but won't. Earlier, I suggested that McLean and Elkind display in this volume many of the skills of a corporate anthropologist. I also commend them on their skills as storytellers. Of course, it helps to have many colorful characters and such an interesting narrative. Among business books, this is one of the rare "page turners." If Enron remains a classic example of organizational dysfunction, my guess is that this book will remain the definitive analysis of the causes and effects of that dysfunction.
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on October 17, 2003
Like many, I followed the Enron disaster as it unfolded with a certain curiosity usually reserved for matters closer to home. Somehow, the more I learned, the more intrigued I became at the sheer magnitude of the arrogance, incompetence and irresponsible management displayed by executives who were surely thought to be 'the smartest guys in the room'. Fearing the media at large was skewing the coverage afforded to Enron on a whole, I looked forward to a book or report that would serve as a definitive look into the entire Enron affair with the type of thoughtful and provocative investigation that "The Smartest Guys In The Room" provides. Having been extremely disappointed with another recently read Enron expose, I could not recommend "The Smartest Guys In The Room" highly enough. Not only do McLean and Elkind do an excellent job in uncovering the facts, they do so in a crisply entertaining and enticing manner that kept me interested and consumed the entire way through. From the opening chapter, the authors flush out the characters, establish the timeline and ultimately piece together an incredibly insightful story of greed, ignorance and outright superciliousness, worthy of anyone's time and attention. "The Smartest Guys In The Room" is an incredible section of work that deserves to be recognized as the truly inspired endeavor that it is.
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on November 10, 2003
As a former energy merchant employee and power/gas deal structurer who watched the collapse of Enron and so many others in the industry from the "inside," this text gives accurately portrays key features to Enron's demise: (1) the amazing and ingenius personalities involved, (2) the development of a complex industry, (3) political, market, regulatory, and accounting/tax dynamics that enabled and facilitated manipulation, and (4) unstoppable greed.
I concur when several other readers when they point out that this text is dense and highly technical. This Enron book is best suited for those who already have a background the energy, financial, and trading industry. If the terms "stack and roll," "Henry Hub," "take or pay," or "back-to-back" are foreign to the reader, the book may seem tedious and boring. If the above terms are familiar and sources of interest, this book is for you.
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on October 17, 2003
For someone like me who sits on a corporate board and did business with Enron (and knew some of the Enron executives involved) -- this book confirms what I suspected for years before the fall: Enron was a sleazy, unethical, immoral company run by crooks. This debacle was encouraged and allowed to happen by the outside directors on the Enron Board. Only they could have stopped it. But as the book makes clear, they never asked the most basic questions any director should ask. Sadly, these directors will probably never be held accountable for their malfeasance. If justice prevails, at least Lay, Skilling and Fastow will ultimately do hard time and forfeit their enormous illegal gains. This book should be required reading for every corporate director. One disagreement with the authors; the Enron players were not the smartest. They were simply brazen, arrogant crooks who thought they were the smartest.
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on May 2, 2004
Enron was the largest corporate bankruptcy to date. Just a year earlier it was a 70-billion dollar company and the most respected company in the energy field. By the end of 2001 Chuck Watson of Dynegy said he wouldn't take it if it were free. What happened? How could such a large and powerful conglomerate, in which analysts hyped right to the bitter end, fall so fast. Bethany McLean and Peter Elkind take the reader from the beginning of Enron's rise to the colossal fall.
From the beginning Enron was determined to rewrite the "rules" of how the business of energy was done around the world. Ken Lay, the founder of Enron, learned the natural gas business from his early days at Florida Gas and then Transco Energy. In the early 1980's gas prices were largely regulated by the federal government. This led to gas shortages when prices were too low and oversupply when the government hiked prices. Distributors would try to lock into long-term contracts called "take or pay" to protect themselves from future shortages. These contracts were bad from the pipeline owner's point of view because they had to pay the higher rates even if lower rates were available. Lay saw a way out of this dilemma, however. He set up a fledgling spot market for natural gas. The producers who let Transco out of these long-term contracts could sell directly to their customers, paying Transco to move the gas. Lay was a hero and it would propel him toward his vision of a deregulated gas world in which customers would always have the gas they need at the best price.
When Ken Lay created Enron he had a different view of energy than anyone else in the business. When energy was deregulated in the late 19080's prices plunged. Money wasn't being made in oil; it was being made in trading oil. This was Lay's grand vision. In the words of the authors:"Oil trading was about trading, not about oil." The senior executives didn't know much about trading but as long as it made money no one cared. Oil trading was a way of promising to deliver oil in the future while locking in the price today.
From its earliest days Enron struggled to survive. Lay had a vision of the future but he needed someone to show him the way. Enter Jeff Skilling. To Skilling natural gas wasn't about energy; it was about supply and demand. Whenever there was too much supply or too much demand there was money to be made. Instead of long-term contracts between suppliers and customers Skilling envisioned Enron acting as an energy bank. They would purchase gas from producers at one price and sell it to customers at a higher price. Enron would profit from the exchange and the customer would always be able to get gas. All Enron needed to do was to have matching customers for every contract to buy natural gas. He would revolutionize the oil industry. He never cared for the old oil executives; he wanted smart Harvard graduates under him. It didn't matter to Skilling if they never worked in the industry before; they would figure it out.
The problems with Enron can be traced back to these early days. The people involved had great ideas but were poor in their ability to manage and carry them out. Those that could were treated as second class citizens by Enron management. They rewarded the people with the best ideas. It didn't matter if their grandiose plans never made any money. It would become the culture at Enron-a corporation built on vision but near-sighted on detail.
The book is a long and difficult 414 pages. The deals and machinations of Enron's senior management are difficult and complex. The Smartest Guys in the Room is about these deals and not about the people. We know very little about how people truly felt about Enron through its rise and fall but we know a great deal about the gory details. For those with some accounting background it is a fascinating story. For the general reader it probably will be a bit bewildering
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