“They’re still trying to hide the weenie,” thought Sherron Watkins as she read a newspaper clipping about Enron two weeks before Christmas, 2001. . . It quoted [CFO] Jeff McMahon addressing the company’s creditors and cautioning them against a rash judgment. “Don’t assume that there is a smoking gun.” Sherron knew Enron well enough to know that the company was in extreme sp“They’re still trying to hide the weenie,” thought Sherron Watkins as she read a newspaper clipping about Enron two weeks before Christmas, 2001. . . It quoted [CFO] Jeff McMahon addressing the company’s creditors and cautioning them against a rash judgment. “Don’t assume that there is a smoking gun.” Sherron knew Enron well enough to know that the company was in extreme spin mode…
Power Failure is the electrifying behind-the-scenes story of the collapse of Enron, the high-flying gas and energy company touted as the poster child of the New Economy that, in its hubris, had aspired to be “The World’s Leading Company,” and had briefly been the seventh largest corporation in America.
Written by prizewinning journalist Mimi Swartz, and substantially based on the never-before-published revelations of former Enron vice-president Sherron Watkins, as well as hundreds of other interviews, Power Failure shows the human face beyond the greed, arrogance, and raw ambition that fueled the company’s meteoric rise in the late 1990s. At the dawn of the new century, Ken Lay’s and Jeff Skilling's faces graced the covers of business magazines, and Enron’s money oiled the political machinery behind George W. Bush’s election campaign. But as Wall Street analysts sang Enron’s praises, and its stock spiraled dizzyingly into the stratosphere, the company’s leaders were madly scrambling to manufacture illusory profits, hide its ballooning debt, and bully Wall Street into buying its fictional accounting and off-balance-sheet investment vehicles. The story of Enron’s fall is a morality tale writ large, performed on a stage with an unforgettable array of props and side plots, from parking lots overflowing with Boxsters and BMWs to hot-house office affairs and executive tantrums.
Among the cast of characters Mimi Swartz and Sherron Watkins observe with shrewd Texas eyes and an insider’s perspective are: CEO Ken Lay, Enron’s “outside face,” who was more interested in playing diplomat and paving the road to a political career than in managing Enron’s high-testosterone, anything-goes culture; Jeff Skilling, the mastermind behind Enron’s mercenary trading culture, who transformed himself from a nerdy executive into the personification of millennial cool; Rebecca Mark, the savvy and seductive head of Enron’s international division, who was Skilling’s sole rival to take over the company; and Andy Fastow, whose childish pranks early in his career gave way to something far more destructive. Desperate to be a player in Enron’s deal-making, trader-oriented culture, Fastow transformed Enron’s finance department into a “profit center,” creating a honeycomb of financial entities to bolster Enron’s “profits,” while diverting tens of millions of dollars into his own pockets
An unprecedented chronicle of Enron’s shocking collapse, Power Failure should take its place alongside the classics of previous decades – Barbarians at the Gate and Liar’s Poker – as one of the cautionary tales of our times.
Update: My wife and I just finished watching Enron: The Smartest Guys in the Room, an excellent documentary made in 2005. I recommend it highly, especially as many of the seeds of the current economic crisis were apparent in the machinations of the Enron boys. The parallels are uncanny.
Ken Lay was the product of a very religious background in a small Midwestern town. During work on his PhD in economics, he became enamored of the world of stocks. He parlayed InterNorth, a small energy company intUpdate: My wife and I just finished watching Enron: The Smartest Guys in the Room, an excellent documentary made in 2005. I recommend it highly, especially as many of the seeds of the current economic crisis were apparent in the machinations of the Enron boys. The parallels are uncanny.
Ken Lay was the product of a very religious background in a small Midwestern town. During work on his PhD in economics, he became enamored of the world of stocks. He parlayed InterNorth, a small energy company into Enron. He was a rich man, having made $4 million in stock value increases from the merger of Houston Gas into InterNorth, later renamed Enron. He was also the highest paid CEO in the United States. The company's strengths were also its weakness: the constant risk-taking; the high debt load to ward off potential takeovers; "impassioned embrace of deregulation;" constant reorganization; and instant adoption of the hottest new business ideas. They were soon struggling for cash.
In the meantime, Lay had created a new culture at Enron. It was his belief that all one had to do was hire the best and the brightest, provide a free environment, and things would take care of themselves. He also had trouble saying no to anyone. He hired an old friend to be the "bad guy," but it soon became apparent to all that if you made money for the company you could get whatever you wanted.
Watkins was hailed in 2001, following the collapse of Enron, as a heroine for her "whistle-blowing." Whether her actions actually constitute that appellation is open to question. Certainly she was an insider, and her account reveals a great deal more of the financial shenanigans in greater detail than the previous book I reviewed, Anatomy of Greed. She interacted constantly with Lay, Skilling and Fastow, and if she got really nervous about what she was seeing, perhaps whistle-blowing was just a way of protecting her posterior.
What started out as a new paradigm, a different way of delivering energy, soon became a case of the blind leading the blind, or a corporate version of Dumb and Dumber, as the board and Enron employees began creating numerous new ways of hiding losses, even making losses look like revenue. It was a huge, ever-increasing house of cards.
Watkins is an accountant and naturally had a strong sense of the financial improprieties the company had embarked upon, but the impending doom she warned of in her now-famous memo to Lay should have been obvious to everyone. Enron's own head of research said presciently, "Every era gets the clowns it deserves."
If they ever make a movie of this book, it will have to be a comedy. It is astonishing how stupid many of the "best and brightest" graduates of American business schools were, as they bellied up to the trough of corporate greed. Sherron made an attempt to meet with Ken Lay, but first she had to convince his personal secretary to arrange a meeting. The secretary informed Watkins that "Ken gravitates toward good news. . . ." It did not bode well for the meeting. Another insider told her to make the presentation as simple as possible and eliminate any accounting jargon. She obliged and reworked her presentation so that her two-year-old daughter could understand it. The meeting was a flop, and it was clear to her that Lay could not understand - or perhaps did not want to understand - a thing she was talking about.
Ironically, Osama Bin Laden's exploits barely dented the US economy. Lay's machinations and the subsequent stock free fall provided a vicious slambang. ...more
Wow. It is said that money and power are the root of all evil. This book proves that assertion. It is unbelievable to me - unfathomable actually - that human beings are as greedy and narcissistic as described in this book. Even the heroine, the "whistleblower," was susceptible to these traits and as such, should be given no sympathy. Ken Lay, CEO of Enron was found guilty of 10 counts of securities fraud, circumvented incarceration by dying three months before the judge was to impose sentencing.Wow. It is said that money and power are the root of all evil. This book proves that assertion. It is unbelievable to me - unfathomable actually - that human beings are as greedy and narcissistic as described in this book. Even the heroine, the "whistleblower," was susceptible to these traits and as such, should be given no sympathy. Ken Lay, CEO of Enron was found guilty of 10 counts of securities fraud, circumvented incarceration by dying three months before the judge was to impose sentencing. Jeff Skilling, President was also found guilty & sentenced to 24 years in jail. Apparently, part of his conviction was overturned by the U.S. Supreme Court and remanded back to the lower courts for retrial. Finally, Andy Fastow - CFO and responsible for most of the off-balance sheet financial shenanigans that brought about Enron's downfall - is currently serving a six year sentence.
The book was well written, albeit challenging to understand the financial magic that was the special purchase entities, set up by Fastow to claim the off balance sheet losses that should have been claimed by Enron. One thing that is clear: the stock market is easily manipulated, regardless of the controls and given the amount of puts, warrants and hedging done on a daily basis, no wonder we find ourselves in volatile market conditions. You have to wonder - is our service and virtual economy - anything beyond tangible production - simply a house of cards?
The Enron account, and what is likely to take it's place in the annals of economic history - the mortgage mess, is a true testament that greed and narcissism run rampant and when unchecked can bring down a global economy.
So a couple weeks back an online friend asked me just what the fraud at Enron was. As I was unsatisfied with the answer I gave (more or less concealing liabilities through a web of complex partnerships AKA special purpose entities or SPEs) and, since my library had this audiobook, I figured might as well listen to this.
Book begins by mentioning Houston's origins, including how the original promoters of the territory insisted the local waterway was navigable. (Barely.) Along with the cast of charSo a couple weeks back an online friend asked me just what the fraud at Enron was. As I was unsatisfied with the answer I gave (more or less concealing liabilities through a web of complex partnerships AKA special purpose entities or SPEs) and, since my library had this audiobook, I figured might as well listen to this.
Book begins by mentioning Houston's origins, including how the original promoters of the territory insisted the local waterway was navigable. (Barely.) Along with the cast of characters beginning with Kenneth Lay (one early performance review warned "Might be too ambitious") as the history of the companies that became Enron began. (Formed by the merger of the two biggest natural gas pipeline players in an effort to create the "only" natural gas Supermajor. Name Enron also seemed to be because the "en" was for energy and "on" to try to imitate the oil companies: Exxon, Chevron.) An early trading scandal within the company happened at their Valhalla, NY, where the traders made up fictitious profits. (Some personal significance to the town, so was surprised when the name was mentioned.) Rather than fire the employees -- and risk the full extent of losses being known -- Kenneth Lay kept them. (Book seemed unsure whether it was Lay's mistaken optimism that they could be made obedient workers, whether he thought he could secure greater loyalty from them, or perhaps some other insidious reason.) Naturally that would fail and some of them were prosecuted and given a couple years in jail. Seemed also the starting point for Enron's attempts to trade back from a loss or to obscure it.
Throughout the 90s, the company would embrace the mark-to-market accounting which to some extent reflected the nature of their business, but also began the steady march from initially stretching accounting and other rules to just pretending like it fell under some rule. (As the author notes, it would be unrealistic to think a future profit on transactions could be realized between a farmer agreeing to supply a restaurant as either the farmer could have a bad harvest or the restaurant could go out of business before the end of a contract.) Enron would defend the practices and try to claim it had enough cash should a shortfall occur. (Very tiny amount compared to the liabilities if contracts started souring.) On the bright side, Enron apparently did execute the first ever energy swap contract. (One company wanted a fixed rate, another floating over some time period. Financial institutions typically cater to companies that want one or the other and hopefully get a "balanced" book by finding another counter-party that wants the opposite side of the risk.)
Supposedly if George HW Bush (Bush41) had won reelection in 1992, Kenneth Lay might have been made energy secretary or given another cabinet position, so Enron's history might have been radically different if Richard Kinder had taken the helm.(He ditched Enron in the mid-90s and went on to found the extremely successful pipeline business Kinder-Morgan and amass a personal net worth in excess of $9 billion as of this review.) George W Bush (Bush43) was apparently less fond of Kenneth Lay and is said to have referred to him as "the turd in the punch bowl" despite Lay's decade Republican fundraising efforts. (So it would seem Bush43 was better at judging people than he is given credit.)
At the time Richard Kinder left, Jeffrey Skilling made his move to claim the chief operating officer (COO) position by threatening Ken Lay with quitting too and making Enron look bad if a good number of top executives exited at the same time. Throughout Skilling's rise to the top job, he would compete with Rebecca Mark-Jusbasche (head of Enron International and Azurix for a while) and would ultimately trap and get Lay to force her to leave. (She would sell $80 million worth of Enron stock and, unlike just about every other executive who sold tens/hundreds of millions worth of stock who either was prosecuted or had to settle litigation and lose some of their profits, the Wikipedia article for her currently suggests she never had to give back a cent. Lou Pai and his $300M worth of shares sold -- mere out-of-court settlement of $31.5M in 2008 -- was probably the only bigger winner.)
Book smugly mentions that a lot of the company's acquisitions involved paying high valuations for companies and then -- in one case -- claiming a 50% increase in the company's value after only 27 days of ownership as part of the efforts to meet the company's earnings targets. (Should seem funny the author's analogy to someone trying to do that with a house. Between equity and perhaps never actually taking title, there might have been some people who in fact did that or similar during the housing bubble.) Another quarter the company met its earnings in part by doing a sale-and-leaseback of its headquarters. (Yes. I do wonder if it was disclosed somewhere in the company's financial statements as companies definitely get punished for that sleight of hand.)
The other interesting aspect was the rationale to buying (and overpaying) for Portland General Electric. (Lot of other electric utilities at the time said they would be happy to sell themselves to Enron at a 40% premium to their current market price.) Apparently the New York Mercantile Exchange had recently begun energy contracts for delivery in PGE's territory and Enron apparently needed to own some physical plants to trade/compete in markets. Again there was some interesting chicanery as they put ownership of the plants behind special purpose entities for the sake of dealing with the regulators or some similar odd reason that seemed to only make sense at the time of the passage in the book. (Seemed like what they were doing was either illegal even there.)
One of the few "profit centers" seemed to be when energy prices spiked during heat waves and, obviously, during the California energy crisis. (Apparently California's deregulation did not allow its power companies to enter into long-term contracts, so they were stuck having to enter the spot market and pay the inflated prices set by Enron and others who masterfully manipulated it. Enron would "carry over" some of those profits to future quarters to meet earnings targets. Enron's reality, as usual.)
After that, it seemed like Enron went on steroids with the complex special purpose entities (almost all of which failed in reality to meet the requirements, as none of them transferred the risk or had legitimate economic activity but merely took assets/liabilities off Enron's financial statements) and strangely was able to help collateralize it with Enron's own stock. (Which is why things collapsed fast as Enron's stock finally began falling.) Some of the substantial losses came from Enron Broadband. (Assigning 900 highly paid employees to a division that really could only put out an inferior product as the technology was yet to evolve.) Same for their baked partnership with Blockbuster. (Would have cost Enron $70 per movie they streamed. Also -- even from the the reader's perspective -- did not make much sense why Enron would sign a deal with Blockbuster, as made no sense why Blockbuster would even have Internet rights for that and I suspect the studios hated Blockbuster anyway. Needless to say that quickly fizzled and Enron ultimately paid Blockbuster a $5 million termination fee to walk away.) The end, as described, was naturally dramatic. Coauthor Sherron-Watkins claims to have tried to be the savior by saying the only way the company could survive would be if they came clean and restated their financials. (Saying the company's trading operations -- really its franchise by that point, as its valuable assets were shrinking in number -- would cease to exist if they took too many analyst downgrades.) More stock analysts finally became negative and the Wall Street Journal even was able to obtain partnership documents to Enron's special purpose entities and begin shining light on the company's secrets that only tiny details had previously been known about. Perhaps Enron's fall and collapse was delayed by the company's many donations made at the behest of Kenneth Lay, which made him a community figure. (Skilling thought it a waste of money. As is even now little talked about, Jesse Jackson was on the receiving end of some of the money and met on numerous occasions with Lay.) Given all that was known, seems somewhat surprising that Enron's bankruptcy took so long when the details of the partnerships began to emerge. Might have been too because Dynergy had attempted to buy Enron but ultimately backed out as it became increasingly obvious just how toxic Enron was. (Cost Dynergy CEO Watson his job too, as clearly they did not believe he did the due diligence and was probably looking toward the bragging rights of buying the once great Enron.)
One curious detail I noted was that part of the reason Enron did not fire Sherron-Watkins as she came forward with problems at the company is that if she sued them for wrongful termination, it would permit a discovery process which could have revealed embarrassing information about Enron much sooner. (Even if, realistically speaking, these lawsuits take a long time. As for my personal interest, could be why companies these days seem so eager to settle lawsuits even as they claim the reasons of bad publicity or it costing more to fight it combined with uncertainty on eventual outcome.) Humorous part is Enron's Chief Financial Officer Andy Fastow (who organized the special purpose entities and profited hugely from them at the time) after finally being removed from the title threatened to file a $10 million suit for wrongful termination. (Enron's board of directors by the way waived the conflicts of interest at the time Fastow was helping to conceal the company's problems, but the book suspects it was also because they did not know how much money he was making off it: $40+ million..) Since he cooperated with prosecutors, he would only serve six years in prison and, appropriately enough, Wikipedia says he is now a clerk at a law firm.
Finally there were the show appearances in front of Congress and the Senate, where Barbara Boxer as usual got to display her ignorance by claiming depositor insurance is such a great thing when Skilling had claimed part of Enron's failure was due to not being loaned money by banks. (In reality it meant banks took the risks they did, knowing depositors would not scrutinize them by knowing the deposits were guaranteed.) Rest of it was them grilling the executives in more sane ways, such as asking Skilling -- his Harvard MBA and all -- whether he knew whether a corporation could use its own stock to help collateralize a loan.
As for the parting questions, the book did seem to wonder whether Lay was the ultimate stooge or clever enough to keep from tying himself directly to the illegal activities. (He did appoint the executives to jobs who committed the crimes. In any event, he definitely did not deserve the wealth he had accumulated.) As is probably a common sentiment with Enron, some questions left unanswered on what was real (plenty was definitely fake and for appearance - such as "economist" Paul Krugman having been an Enron adviser: Like many folks associated with Enron, he claims he was just collecting a paycheck), and maybe comes down to "the big lie" as coined by Hitler. If you make a lie big enough, it might be a long time before everyone (media, auditors at Arthur Anderson, financial community, all which Enron gave tons of fee income to) questions it and can unravel it.
Related reading I found interesting was Robert Bruner's Deals from Hell, which mentions Dynergy's aborted effort to buy Enron. (That book suggested while Enron's debt as reported in financial statements was around $13 billion, in reality it was closer to $39 billion.) Always the book Billion Dollar Lessons which talks business failures and reminds us that charisma may not be that attractive a quality for a CEO, saying the three most charismatic people in the past century were Hitler, Stalin and Mao. (Not necessarily in that order.) Always a great time to toss in Charles Mackay's 170+ year-old classic Extraordinary Popular Delusions and the Madness of Crowds that talks about the extreme euphoria many people seem to have for the "new new thing." ...more
Power Failure examines in great detail the story of Enron: the players, the dynamics, the interesting accounting structures - that lead to Enron's ultimate implosion.
Although it's a compelling story, I think the level of detail of the various deals and the effect on Enron's financial statements might confuse the average reader.
Also, the author uses colorful and varied language to describe the people involved - I suppose to give interest to the reader - that don't really mesh. One such instancePower Failure examines in great detail the story of Enron: the players, the dynamics, the interesting accounting structures - that lead to Enron's ultimate implosion.
Although it's a compelling story, I think the level of detail of the various deals and the effect on Enron's financial statements might confuse the average reader.
Also, the author uses colorful and varied language to describe the people involved - I suppose to give interest to the reader - that don't really mesh. One such instance was when she described an Enron executive as "priapic." I kinda knew what she was aiming for, but really?
Anyhoo, worth a read if you can slog thru the descriptions. I haven't read The Smartest Guys in the Room yet, but when I do, I'll see how it compares to this book....more