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

by Bethany McLean

In truth, many Wall Street researchers had largely stopped doing anything that resembled serious securities analysis. That was a second way the role of a Wall Street analyst had changed during the bull market. Once upon a time, an analyst saw his job as trying to assess a company’s long-term prospects. The modern analyst, however, was more a marketer than a researcher and was almost entirely consumed by short-term considerations.

Above all else, analysts focused on earnings per share. They regularly consulted with the company’s investor relations executives, who quietly gave them what came to be known as earnings guidance. Using that guidance, the analysts came up with their earnings estimates for the next quarter (or the next year), which they would then market to their big institutional clients. The estimates of the various analysts were also fed to an organization called First Call, which blended them together to form the consensus earnings estimate. That consensus earnings figure was the number companies needed to meet or beat to keep Wall Street happy—and ensure that their stock would keep going up.

Part of it was that the credit analysts include a company’s access to capital in their analysis—and Enron seemed to have an open spigot from the banks. But the real problem was that while the credit analysts saw many of the pieces that made up Enron’s convoluted financing structure, they never added them all up—and so they never realized how truly precarious it was.