Thoughts on Enron
After reading Conspiracy of Fools, a few points which I found interesting:
The true villain of the story is Andy Fastow, the CFO (and his lieutenant, Michael Kopper). He was the architect of all the financial shenanigans, and he purposefully misled his superiors on repeated occasions. His punishment towards those who questioned his methods was harsh and swift - and it wasn'tjust directed at Enron employees. He got an analyst at one of Wall Street's biggest banks fired for not rating Enron stock high enough, for example.
Ken Lay was a hopeless optimist, and largely blameless for what happened. When Fastow decided to turn Enron into an energy-related investment bank, rather than a regular oil and gas company - Lay was simply out of his league. He believed in the company to the bitter end. He borrowed millions and millions of dollars (for personal use) and it was effectively collateralized solely by Enron stock. When the stock price began to slip in the summer of 2001, he sold shares of his stock to meet margin calls of his bankers.
A common misconception is that he dumped his shares to make a bunch of money prior to the meltdown because he knew what was coming. What he was actually doing was ensuring that he could make good on his personal debt. When the bankruptcy occurred, Lay was financially ruined. Much like his employees. If anything, Ken Lay is guilty of naivete, and that's about it.
Jeff Skilling was much less liable for Enron's failures than he has been made out to be in popular mythology - but his hands are far from clean. Unlike Ken Lay, Skilling was told of the details of Fastow's fraudulent transactions, and thought that they were impressive and bold. He loved that Fastow could think outside the box, and he created a culture in which financial losses were not tolerated. He did not manipulate earnings himself, but he made it possible, even probable that it would happen.
Interestingly, Fastow never told Skilling (or anyone else) how much he personally made off of the illegal off-balance sheet transactions. If he had, Enron would have imploded far sooner. During 2001, Skilling melted down emotionally. He was thin-skinned, and took it personally when the stock dropped after Ken Lay stepped down as CEO. In retrospect, it is assumed that he began to self-destruct (culminating in his resignation in the summer of 2001) because he knew that Enron was a sinking ship - but in fact he was having severe emotional problems at the time and was unable to cope with the responsibilities of his job. Be that as it may, Skilling believes he did nothing wrong but he probably should do some jail time. A CEO of a Fortune 50 company has to have the magic eye for these types of things. His epitaph will read: "he should have known better".
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- In retrospect, it really was a conspiracy of fools. After reading a detailed account of the debacle, one begins to realize that the fraudulent ideas, far from being brilliant (in an evil genius kind of way), were really quite stupid. These were not the smartest guys in the room. Every group or individual in a position of power to block the transactions thought that they looked really odd, but assumed that someone else had closely scrutinized the details. If that someone else signed off on it, then it must be okay.
- The company's true implosion began when Skilling resigned, and was replaced by Greg Whalley. He saw the losses the Fastow's fraudulent transactions were causing, and matter of factly decided to disclose them. Accept the loss and move on - after all, all the losses I recognize quickly I can pin on the last guy. As soon as the losses were disclosed to the public, it was all over.
- A common myth is that Enron employees were prevented from selling stock in their 401k plans for an entire month - as Enron imploded and the stock became worthless. In reality, the company had been scheduled to switch 401k plans and the switch happened to occur at a bad time. During the switchover, which only lasted for about a week, Enron employees could not sell their stock. During that week, the price of Enron stock dropped approximately $4. Shirts were not lost during that time. Irony of ironies - when the freeze period ended, Enron employees purchased thousands of shares of Enron stock, figuring that since the price had dropped it was a great time to buy shares at bargain prices.
- Another common myth is that Enron sufficiently manipulated California's energy markets during 2000 to cause rolling blackouts across the state. In reality, Enron did fraudulently manipulate California's markets, but they were simply taking advantage of a terrible law. The state would have had the crisis with or without Enron. It had a lack of supply (due to slow approval of new power plants from environmental regulations), a heat wave, and a system which forced utilities to buy power on the spot market and sell it to customers at fixed rates (which is highly risky).
The demise of Andersen will be discussed in a later post.
posted by JM @ 9:12 PM
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