# The Smartest Guys in the Room & Conspiracy of Fools (books about Enron) **URL:** \ **Category:** Cafe Society\ **Created:** [April 17, 2009, 5:42pm UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445 "2009-04-17T17:42:54Z")\ **Posts on this page:** 9\ **Page:** 1
**Author:** ![Captain\_Amazing](https://avatars.discourse-cdn.com/v4/letter/c/6de8d8/32.png) [@Captain\_Amazing](https://boards.straightdope.com/u/Captain_Amazing)\ **Post date:** [April 17, 2009, 5:42pm UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/1 "2009-04-17T17:42:54Z")
I’ve been rereading The Smartest Guys in the Room by Bethany McLean and Peter Elkin, both of Fortune Magazine, and Conspiracy of Fools by Kurt Eichenwald, of the New York Times. Both books look at the history of Enron and the events leading up to the Enron scandal, but they each find different reasons for the scandals. So, I’m starting the thread to see if anyone else read the books, and what they think of them. The Enron scandal shouldn’t be news to anyone at this point, but because it’s been a while since the scandal broke, just to remind everyone, Enron was a natural gas pipeline company headquartered in Houston, Texas. In the nineties, Enron, spurred on by the stock market boom and the general exuberance, engaged in a massive expansion, expanding into such fields as power generation, water distribution, and even broadband services. Many of these investments were ill concieved and led to massive losses. In order to hide these losses and artificially inflate their profits and therefore their stock price, Enron engaged in a serious of questionable and illegal financial transactions, setting up false investment companies, and then “selling them” unprofitable assets, thereby to hide debt and list those sales as income on their balance sheets. Of course, these “sales” were in reality nothing of the sort, because in most of those cases, the companies were in reality owned by Enron, and the money they used to buy the assets from Enron was in actuality Enron’s money. Eventually this whole system collapsed, Enron fell apart and had to declare bankruptcy, and a number of Enron executives were prosecuted and went to jail. Both books agree on the general timeline of events, of course, but they each find a different villain that they blame for Enron’s collapse. The Smartest Guys in the Room focuses on Jeff Skilling, Enron’s Chief Operating Officer. It argues that Skilling had the attitude that competition at any cost was healthy, and that a company should hire visionaries who aren’t afraid to challenge the status quo and bend the rules, if neccesary, and then give them free reign to compete against each other and the company would thrive. The book argues that this led to a kind of paranoid, win at any cost mentality that destroyed corporate communication, and, since the only thing that the company rewarded was bringing in profit, those divisions of the companies that stood in the way of that, like risk management and internal auditing, found themselves without power. In addition, this led to a kind of arrogance that meant that the profit makers figured the laws didn’t apply to them…that they were sort of Nietzschean supermen who could ignore the laws that were inconvenient. Conspiracy of Fools, on the other hand, put most of the blame on Andy Fastow, the CFO. It argues that most of the illegal deals were his idea, and that he structured them so that he and his allies in the company would benefit personally. By doing that, he set up a massive conflict of interest where he used insider information to set up deals that hurt Enron and financially rewarded them, and used his influence to pressure Arthur Anderson, Enron’s accountants to go along, as well as blocking anyone in the company who tried to speak up against him. The rest of the Enron executives, including Skilling, went along with it because he kept the books looking good and the stock price up, and just didn’t care what he did as long as he accomplished those goals. What both books seem to agree on is the almost total non-involvement of Ken Lay, Enron’s CEO, in the running of the company. They both portray him as someone in love with the perks that being CEO gave him…his status as a community leader, a charitable giver, and political bigwig, but who didn’t have any interest in running the company or making decisions. So, did anyone else read the books? What did you think? ---
**Author:** ![Sage\_Rat](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/sage_rat/32/399_2.png) [@Sage\_Rat](https://boards.straightdope.com/u/Sage_Rat)\ **Post date:** [April 17, 2009, 6:11pm UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/2 "2009-04-17T18:11:48Z")
I haven’t read either, but the CFO, Conspiracy of Fools, version seems more plausible. Getting bullied by your boss to **succeed** usually makes people shut down and try to be the least noticeable person there is. It doesn’t lead people to get creative and invent extravagant measures like setting up dummy corporations. It’s also unlikely that any of them would have even had the corporate ranking to be able to do something like that. CFOs also tend to be slightly slimy in my experience. The job of CFO is largely unrelated to accounting, oddly. It’s more a super high power salesman job. You go around giving people the hard sale to invest in you. And it’s more often that salesmen are the gung-ho, macho type that believes that their follies will never catch up with them. COOs vary between blusterers and huggable walruses. It sounds like theirs was more the blustering type. (Yes yes, stereotyping is bad and evil. There’s just as many people who don’t match the above, etc.) ---
**Author:** ![Captain\_Amazing](https://avatars.discourse-cdn.com/v4/letter/c/6de8d8/32.png) [@Captain\_Amazing](https://boards.straightdope.com/u/Captain_Amazing)\ **Post date:** [April 17, 2009, 9:01pm UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/3 "2009-04-17T21:01:40Z")
> [@Sage\_Rat](#): > > I haven’t read either, but the CFO, Conspiracy of Fools, version seems more plausible. Getting bullied by your boss to **succeed** usually makes people shut down and try to be the least noticeable person there is. It doesn’t lead people to get creative and invent extravagant measures like setting up dummy corporations. It’s also unlikely that any of them would have even had the corporate ranking to be able to do something like that. I think that there’s enough blame to go around, and I think the truth is somewhat in between. Certainly the fraudulent financial instruments were the creation of Fastow, and his lieutenants, Michael Kopper and Ben Gilsan, but a large part of the reason they were able to get away with it, and why more questions weren’t raised about it were, first, because the switch to mark to market accounting meant that new deals always had to be churned out, and second, because the layout of Enron’s compensation committee let Fastow punish people who didn’t go along with him. And all that was the fault of Skilling. He set up an environment where Fastow could do what he wanted without reprecussion. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [April 18, 2009, 12:57am UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/4 "2009-04-18T00:57:25Z")
I’ve read both books (as well as a number of others), and I think that both of them are correct because they focused the blame on different people. Think of the two books as a couple of blind people describing the elephant. Snake or tree? Both are correct due to their different perspectives: Jeff Skilling: unbelievably arrogant about his mental prowess and his ability to sell anything, he truly believed he was the smartest guy in whatever room he walked into. And possibly was… but then, so am I whenever I go home to my wife, daughter, and two female dogs. 😉 Andrew Fastow: Corporate CFO and deal-maker who didn’t understand many basic accounting principles. Was obviously charming and persuasive, for how else could he convince so many people who should’ve (and did) know better to approve JEDI, CHEWCO, and the LJM’s? Of the two, I preferred _Conspiracy of Fools_, for I think it got closer to the heart of the matter: The people at Enron convinced themselves that they were smarter than everyone else, but in fact, they were extremely foolish in almost everything they did: Skilling’s push to mark-to-market accounting in 1991 (which was the basis and driver of all that followed), Fastow’s off-balance sheet vehicles, Rebecca Marks’ inability to properly value assets, the corporate bonus structure that paid people based upon revenue generated instead of profits earned, so many others. Ken Lay, despite the bad press, was really guilty of nothing more than a failure of oversight… but then, so was Enron’s board, so was Clinton’s SEC, so was the financial press and 99.98% of all analyst’s. Obviously he needed to go, but the pilloring he received in the press was, in retrospect, a bit excessive. (And Sherron Watkins was nothing more than opportunist who benefitted from lucky timing, in my humble opinion). It is worth noting that a growing number of people, including Warren Buffet, blame much of the current financial crisis on mark-to-market rules, and it’s hard to argue with them. Skilling (and Enron) were merely harbingers of what was to come 7-8 years later, just on a larger scale. Once the market stops believing, the value of derivatives disappears _regardless_ of the quality of the underlying assets. If the market disappears (as it did last September), your balance sheet is effectively destroyed for there is no market to mark their value against. ---
**Author:** ![Baron\_Greenback](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/baron_greenback/32/48_2.png) [@Baron\_Greenback](https://boards.straightdope.com/u/Baron_Greenback)\ **Post date:** [April 18, 2009, 1:17am UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/5 "2009-04-18T01:17:33Z")
> [@JohnT](#): > > Ken Lay, despite the bad press, was really guilty of nothing more than a failure of oversight… He was Chairman and CEO from around 1995 to 2003. Poor mislead Ken - just “a failure of oversight”. That was his fucking job. ETA the rest of your excuse: > [@](#): > > but then, so was Enron’s board, so was Clinton’s SEC, so was the financial press and 99.98% of all analyst’s. Obviously he needed to go, but the pilloring he received in the press was, in retrospect, a bit excessive. Granted failures up and down the chain, but “a bit excessive”! The man should have done hard time for the rest of his life. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [April 18, 2009, 1:25am UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/6 "2009-04-18T01:25:58Z")
Yes, but it was also the job of the SEC… and you didn’t see them getting killed in the press, even though Enron _admitted_ what it was doing in their own financial filings. That’s how Enron was busted - because somebody started actually reading the financials, which were to be reviewed by the SEC. They explicity state that a “Senior Financial Executive” was running partnerships that were doing business with Enron… and yet not a single person caught the references for over _four_ years. Now I’m not absolving Lay’s guilt in not watching over his subordinates, but it was the subordinates that conducted illegal activities, not necessarily Lay himself. That’s all I’m sayin’. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [April 18, 2009, 1:27am UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/7 "2009-04-18T01:27:42Z")
For the OP, let me [quote myself] ([http://boards.straightdope.com/sdmb/showpost.php?p=7140735&postcount=25](http://boards.straightdope.com/sdmb/showpost.php?p=7140735&postcount=25))from a thread 3 years old: > [@](#): > > While Enron was mentioned as an “extreme” example of a short-sighted corporation, the actions of the company psychologically mirror that of a person getting “over their head”, finally heading into illegalities. > > Enron didn’t start out as a Ponzi scheme - it was a nice, medium-sized player in the natural gas industry, an owner of almost 40,000 miles of pipeline when the two parent companies (Houston Natural Gas & InterNorth, iirc) merged in 1985. The name “Enron” was proposed and accepted in 1986, and the company spent the next few years trying to find an identity… one it found with Jeff Skilling. > > Jeff Skilling had a brilliant idea - “banking” and commoditizing natural gas service contracts, essentially creating a commodities market where one never existed before. It was a good idea, one whose time had come, but Skilling - and Enron - first got in over their head when they petitioned the SEC to use “mark-to-market” (mtm) accounting instead of traditional cost-accrual accounting. Mtm accounting essentially allowed you to book future revenues today - if you signed a $20mil contract for 20 years at $1mil/year, mtm accounting would allow you to book $20mil of earnings - even though you only received $1mil in cash. The remaining cash does not show up on future earnings as it was already accounted for in Year 1\*. > > In the atmosphere of the 1990’s, this change became a killer - if you booked all your revenues every quarter, then you essentially start at $0 when the quarter rolls over. If the analysts expect you to do better every quarter than the last… ! > > So it was a pressure cooker. And what happened is natural: Bad deals were made. Other executives spent untold billions trying to bring power to third world countries, only to be in charge of assets worth 1/4 what they paid for them three years prior. People were driven to increase revenues at all costs, resulting in a very competitive, macho environment, the sort that led to the power abuses in California in 2000 (And Enron wasn’t the only player doing that to California - there’s a lot of companies thankful that Enron took the bullet aimed for them as well), the sort that led to lapses in ethical judgements, lapses that became easier and easier the more you did it. > > Mtm accounting didn’t bring about Enron’s downfall, however. If needed, they could’ve changed back to cost-accrual and taken some very painful financial hits… but the company would still be around and there wouldn’t have been indictments. (probably. ) > > What got them into trouble, when they crossed the legal edge for good, was in 1997 when Andy Fastow set up a number of Special Purpose Entities (SPE’s) to take “off-book” Enrons rapidly accumulating stock of bad third-world investments. You only have to know one thing about SPE’s - 3% of the money invested has to be by “outside investors”, i.e., people not employed or related to employees of Enron. > > The very first SPE had as it’s 3% owner the gay lover of an Enron executive. However, the man was so incapable of understanding the SPE that it is readily apparent that he is nothing but a front for the executive. > > While it wasn’t shouted from the rooftops, Arthur Andersen, the Enron Board, Lay/Skilling/etc, all could’ve found out. But they didn’t. And they let the SPE go through. And they let the first one create other SPE’s, all of them designed to take bad assets and debts off Enron’s books so they could make their quarter. Every 3 months. > > And again… it wasn’t as if they meant to break the law. The most fascinating thing about the Enron story is that every agency charged with oversight (Enron officers, the Board, Andersen, Moody’s, the SEC, the IRS) assumed that the other people knew what they were doing and were doing it. Andersen approved of stuff because the Board approved, and the Board approved because they thought that Andersen approved. It was, in many way, the Kitty Genovese of corporate bankruptcy’s, where everybody (including government regulators, the IRS, the SEC, the banks, the rating agencies, Enron’s executives, Enron’s rank-and-file, everybody) saw that crimes were occurring but they all deflected responsibility to the other watchdogs who were also watching the victim get pummelled, saying nothing. > > It was the unravelling of the first SPE that finally drove Enron into bankruptcy, when it was determined that the 3% outside equity holder wasn’t really “outside enough”, putting all the debt and losses again on Enron’s books, making the company essentially worthless. We’re talking about close to $40 billion in debt here, enough to sink almost any company. > > So Enron displayed all the classic signs of a person going over their head in debt. Bad decisions lead to pressure and stress which leads to even worse decisions. It’s a cycle that hard to break out of, almost impossible when you have such powerful and seductive ennablers on your side (oddly enough, the ennabler for both the family and Enron are credit-extending banks and institutions. ). > > \*There are certain industries where this is a valid accounting method - but Enron wasn’t one of them! ---
**Author:** ![Captain\_Amazing](https://avatars.discourse-cdn.com/v4/letter/c/6de8d8/32.png) [@Captain\_Amazing](https://boards.straightdope.com/u/Captain_Amazing)\ **Post date:** [April 18, 2009, 1:40am UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/8 "2009-04-18T01:40:09Z")
> [@Struan](#): > > He was Chairman and CEO from around 1995 to 2003. Poor mislead Ken - just “a failure of oversight”. That was his fucking job. 1986-Feb 2001, then August 2001-Jan. 2002 > [@](#): > > Granted failures up and down the chain, but “a bit excessive”! The man should have done hard time for the rest of his life. Well, that’s one of those things that wasn’t really possible, for obvious reasons. I think what is “a bit excessive”, though, is that the common perception of Lay is that he was engaged in active fraud when there wasn’t really much evidence that he actually knew about most of the illegalities going on. He certainly should have known, and he deserves blame for not knowing, and for defrauding Enron’s stockholders by not doing the job he was being paid good amounts of money to do, but he wasn’t guilty in the same way that people like Skilling, Fastow, or Causey were guilty. ---
**Author:** ![Baron\_Greenback](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/baron_greenback/32/48_2.png) [@Baron\_Greenback](https://boards.straightdope.com/u/Baron_Greenback)\ **Post date:** [April 18, 2009, 2:09am UTC](https://boards.straightdope.com/t/the-smartest-guys-in-the-room-conspiracy-of-fools-books-about-enron/493445/9 "2009-04-18T02:09:01Z")
> [@JohnT](#): > > Now I’m not absolving Lay’s guilt in not watching over his subordinates, but it was the subordinates that conducted illegal activities, not necessarily Lay himself. That’s all I’m sayin’. I can’t lay aside Lay’s guilt (awkward sentence!), because he was the man in charge, and that is where the blame ultimately has to fall, but I do think that the largest modern corporations have become ungovernable. How many corporate entities made up the company known as Enron? They were toy town compared to the big boys. How many make up AIG, BP, Shell, ExxonMobil or GE? Is it even possible for the boards of the parent companies to grasp what is going on in their vast realms, much less any kind of government regulator? I doubt it.