The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

by Bethany McLean

One day, Hecker wrote a parody, which he showed to a few colleagues. Sung to the tune of “Hotel California,” he called it the “Hotel Kenneth-Lay-a”: Welcome to the Hotel Mark-to-Market Such a lovely face Such a fragile place They livin’ it up at the Hotel Cram-It-Down-Ya When the suits arrive, bring your alibis Mirrors on the 10-K, makes it look real nice And she said, we only make disclosures here Of our own device And in the partners’ chambers Cooking up a new deal 3% in an SPE But they just can’t make it real Last thing I remember I was running for the doors I had to find the entries back To the GAAP we had before “Relax,” said the client “We are programmed to succeed You can audit any time you like But we will never bleed”

Another kind of minority-interest transaction took place toward the end of 1999, when Enron was desperate to show cash flow. In a deal called Project Nahanni, Enron, in essence, borrowed $485 million from Citigroup and raised a sliver of equity ($15 million) through a minority-interest financing, used that money to buy Treasury bonds, sold the Treasury bonds, and booked the proceeds as cash flow from operations under the pretext that buying and selling bonds was part of Enron’s day-to-day business. That $500 million represented a staggering 41 percent of the total $1.2 billion in operating cash flow that Enron reported that year.

It was at a budget-planning session for the year 2000 that Skilling discovered just how bad things really were. He was expecting the international executives to present plans to bring in $500 million in operating profit; instead, they projected less than $100 million. He thought at first they were lowballing him, giving him a number they knew they could beat. He soon discovered that just the opposite was true: the $100 million was a stretch. “We invested $5 billion in equity to earn $90 million?” he asked in disbelief.

Nonetheless, Enron Broadband Services—EBS, it was called internally—exuded the company’s version of brash cool. Its offices were vintage dot-com, with whiteboards that hung floor to ceiling and funky indirect lighting. Ken Rice’s imprint was evident, too: he had placed a huge gleaming-red Hellcat motorcycle, custom-built in Louisiana for $30,000, outside the elevators of EBS’s executive floor. It was inscribed with the words BANDWIDTH HOG.

Though Enron had boasted of allowing customers to choose from “a large library of movies,” the trial offered a feeble collection of offerings. The standard fee was $5 a film—Enron’s share was just $1.20—but many of the customers in the test markets weren’t even charged. Even then, few used the service; each household watched an average of just 1.8 videos a month—half of what Enron expected. Broadband executives sat in meetings poring over reports on the pilot’s comically pathetic results: The Care Bears Movie: seven purchases—$8.40. When Cox excitedly reported his movie proceeds at one gathering, another executive handed him a $5 bill and said, “I just doubled your revenue.”

A series of slides then recast popular films to portray the exploits of several of the EBS executives who’d worked on the Blockbuster deal. One of them was called “Mike Krautz and The Search for the Holy Monetization.” “Mike scours the globe in search of the holy mark-to-market—I mean monetization,” the narrative read. “This monetization is supposed to bring everlasting life, but Mike soon discovers that his immortality lasts for only one quarter.” Another slide offered up a variation on Thelma & Louise, starring two EBS employees: “After Kevin tells them that they are responsible for unwinding the Blockbuster deal next quarter, the two decide to make a run for the border. In the end, they both drive over a cliff, choosing the more attractive exit strategy.” Blockbuster’s inability to obtain first-run videos inspired the casting of Kevin Howard as Forrest Gump (“A monetization effort is like a box of chocolates, you never know what you’re going to get”), with a buddy who “has all kinds of content—‘kids’ movies, action movies, animal movies, home movies, shrimp movies, just no hit movies.’ ”

After the purge of the Pai regime, a veteran trader from wholesale named Don Black was brought in to take over the trading desk. After he’d been there for a while, Black summed up his EES experience this way to a colleague: “It’s like going to work every day with your hair on fire and nothing to put it out with but a hammer.”

After the disastrous conference call ended, the Enron brass rushed over to the Hyatt for another packed all-employee meeting—held in a distinctly different climate. With Enron’s stock heading toward $19, Lay evoked the events of September 11. “Just like America is under attack by terrorism,” he declared, “I think we’re under attack.”