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Power Failure Power Failure Power Failure
""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] JeffMcMahon 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 knowthat 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 theposter 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 inAmerica. 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 otherinterviews, "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, KenLay'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 analystssang 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 WallStreet 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 sideplots, 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 Texaseyes and an insider's perspective CEO Ken Lay, Enron's "outside face," who was more interested in playing diplomat and paving the road to a political career than in managingEnron'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 ofmillennial 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 hiscareer 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 "profitcenter," creating a honeycomb of financial entities to bolster Enron's "profits," while diverting tens of millions of dollars into his own pockets An unprecedentedchronicle 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. "From the Hardcover edition."
352 pages, Kindle Edition
First published March 25, 2003
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May 28, 2009
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 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.
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.
March 3, 2012
Watkins wasn't a whistle blower,
she saw the fraud at Enron, told Ken Lay about it,
and when he told her to be quiet about it,
SHE COMPLIED, & GOT A PROMOTION.
Conspiracy of Fools is an infinitely better book
she saw the fraud at Enron, told Ken Lay about it,
and when he told her to be quiet about it,
SHE COMPLIED, & GOT A PROMOTION.
Conspiracy of Fools is an infinitely better book
December 11, 2018
If you lived through the late 1990's and early 2000's you may be aware of the basic, headline grabbing story of Enron. A small energy company who's core business was in pipelines and natural gas grew over the late 80's and 90's into the world's largest energy company who invented the idea of the energy trading market. Through questionable accounting, poor (criminal) decisions, and a culture that pushed everybody to make as much money as they could, however they could, the company eventually imploded, crashing so far that the company never recovered. Today Enron, if people know it at all, or even hear the name, see the company's story as a cautionary tale (at best), or as a laughing stock, suitable only as the butt of jokes.
Mimi Swartz (along with Sherron Watkins - an Enron employee and the one held up in the press as the whistle blower who helped shed light on the company and presaged it's fall from power) tells the story of Enron from before it's founding, through it's rise and dominance, and then the eventual fall. Mimi shows us who Ken Lay, Jeff Skilling, Andy Fastow and the other leaders of Enron were, and what drove them. (Usually greed.) Effort is taken to show how driven the company was to make money at all costs, how this culture spread throughout the company, and the many times that questionable decisions were taken. The story is interesting because of how willing so many people were to overlook questionable practices (in time these became illegal practices) because of greed and a feeling that Enron didn't have to abide by the rules because they made them. Even people who didn't get rich went along with decisions (or were bullied into them) and as long as people were getting rich they were willing to look the other way. In that sense Power Failure is an interesting look at the kind of thinking that can easily dominate a company, allowing small problems to snowball into the kind of issues that can take a company down. It is important to learn this lesson because many times it is the ordinary worker who suffers the most while those at the top manage to avoid any responsibility for their actions. In the case of Enron - and not covered in the book because the cases were still pending at the time of publication - Lay, Skilling, Fastow, and others were all indited and convicted on charges of fraud, conspiracy, and insider trading. For this reason alone it is important to remember the Enron story to make sure that business leaders are held accountable.
Mimi makes a mostly balanced look at the company, trying to show it dispassionately. Some might feel that including Sherron Watkins in the narrative gives a decidedly negative, or one-sided view of the company. However, I found that Sherron's story and inside knowledge of the company helped to make the company and the people there (especially upper management) relateable. Without that perspective it would be hard for somebody who wasn't an employee to really understand (let alone comprehend) what went on at Enron.
I would recommend Power Failure for anybody who is in management or business as a cautionary tale. While the events may seem like ancient history - and Power Failure itself was written nearly 18 years ago - the story of Enron is an important one for readers of US history as the demise of the company has had far-reaching repercussions in accounting and finance. (The Sarbanes–Oxley Act of 2002 was a direct result of Enron's fiasco.)
Mimi Swartz (along with Sherron Watkins - an Enron employee and the one held up in the press as the whistle blower who helped shed light on the company and presaged it's fall from power) tells the story of Enron from before it's founding, through it's rise and dominance, and then the eventual fall. Mimi shows us who Ken Lay, Jeff Skilling, Andy Fastow and the other leaders of Enron were, and what drove them. (Usually greed.) Effort is taken to show how driven the company was to make money at all costs, how this culture spread throughout the company, and the many times that questionable decisions were taken. The story is interesting because of how willing so many people were to overlook questionable practices (in time these became illegal practices) because of greed and a feeling that Enron didn't have to abide by the rules because they made them. Even people who didn't get rich went along with decisions (or were bullied into them) and as long as people were getting rich they were willing to look the other way. In that sense Power Failure is an interesting look at the kind of thinking that can easily dominate a company, allowing small problems to snowball into the kind of issues that can take a company down. It is important to learn this lesson because many times it is the ordinary worker who suffers the most while those at the top manage to avoid any responsibility for their actions. In the case of Enron - and not covered in the book because the cases were still pending at the time of publication - Lay, Skilling, Fastow, and others were all indited and convicted on charges of fraud, conspiracy, and insider trading. For this reason alone it is important to remember the Enron story to make sure that business leaders are held accountable.
Mimi makes a mostly balanced look at the company, trying to show it dispassionately. Some might feel that including Sherron Watkins in the narrative gives a decidedly negative, or one-sided view of the company. However, I found that Sherron's story and inside knowledge of the company helped to make the company and the people there (especially upper management) relateable. Without that perspective it would be hard for somebody who wasn't an employee to really understand (let alone comprehend) what went on at Enron.
I would recommend Power Failure for anybody who is in management or business as a cautionary tale. While the events may seem like ancient history - and Power Failure itself was written nearly 18 years ago - the story of Enron is an important one for readers of US history as the demise of the company has had far-reaching repercussions in accounting and finance. (The Sarbanes–Oxley Act of 2002 was a direct result of Enron's fiasco.)
January 29, 2017
Given that Power Failure was written with Sherron Watkins (a player of sorts in the situation), I expected it to have some unique insights but to be very agenda driven. While Watkins comes out of it looking good, the book's strength actually turns out to be its relatively "straight" recounting of the events. One can't pretend to be "unbiased" about the figures involved in the Enron scandal, but Power Failure does not aggressively push any particular theory about why things went wrong (compared to, for example, Kurt Eichenwald's Conspiracy of Fools). Since it manages to that without being completely boring, it's a worthwhile book to have in the mix of books about Enron.
February 10, 2013
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 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."
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."
July 22, 2024
THE STORY OF ENRON'S DOWNFALL TOLD BY A FORMER VICE PRESIDENT
Sherron Watkins is the former Enron vice president who (unsuccessfully) attempted to inform CEO Ken Lay of concerns about the company in 2001, and eventually testified before Congress; Mimi Swartz is a journalist and writer.
They note that "Introspection, on a personal or professional level, was not an activity highly valued at Enron." (Pg. 8) After its collapse, people wondered: "Had it ever been a real company? Or had Enron been, from the very beginning, just a brilliant illusion?" (Pg. 15)
Enron president Jeff Skilling "hired people who were very young, because (they) did not insist on coming in at nine and leaving at five, or on keeping things as they had always been, or, for that matter, on questioning authority once they had signed on with him." (Pg. 58) "Enron Gas Services was developing a reputation as a predatory place where people would sell each other out to survive." (Pg. 61) They were assisted by a $250 million partnership with the CalPERS pension fund in 1993. (Pg. 64) Ironically, Enron in 2000-2001 manipulated the supply of energy to California, in order to drive their prices up (Pg. 240-241), and it took a governmental freeze of prices to end the resultant energy crisis in California (Pg. 267).
The traders at Enron began making the most money, which "in a company that valued making money above all---meant that the traders became increasingly exempt from the rules at Enron." (Pg. 78) At Enron, "being ordinary was the kiss of death, and being a star---rich, smart, and free---was everything." (Pg. 190)
After Enron's collapse, CEO Ken Lay's wife tearfully claimed on the Today show that she and her husband had "lost everything" and "were selling everything they owned." (Of course, reporters swiftly determined that this was not true for their many millions of dollars of properties.) [Pg. 348]
Not the most detailed "factual" survey of Enron (see 'Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron), Watkins' inside information makes this a fascinating read.
Sherron Watkins is the former Enron vice president who (unsuccessfully) attempted to inform CEO Ken Lay of concerns about the company in 2001, and eventually testified before Congress; Mimi Swartz is a journalist and writer.
They note that "Introspection, on a personal or professional level, was not an activity highly valued at Enron." (Pg. 8) After its collapse, people wondered: "Had it ever been a real company? Or had Enron been, from the very beginning, just a brilliant illusion?" (Pg. 15)
Enron president Jeff Skilling "hired people who were very young, because (they) did not insist on coming in at nine and leaving at five, or on keeping things as they had always been, or, for that matter, on questioning authority once they had signed on with him." (Pg. 58) "Enron Gas Services was developing a reputation as a predatory place where people would sell each other out to survive." (Pg. 61) They were assisted by a $250 million partnership with the CalPERS pension fund in 1993. (Pg. 64) Ironically, Enron in 2000-2001 manipulated the supply of energy to California, in order to drive their prices up (Pg. 240-241), and it took a governmental freeze of prices to end the resultant energy crisis in California (Pg. 267).
The traders at Enron began making the most money, which "in a company that valued making money above all---meant that the traders became increasingly exempt from the rules at Enron." (Pg. 78) At Enron, "being ordinary was the kiss of death, and being a star---rich, smart, and free---was everything." (Pg. 190)
After Enron's collapse, CEO Ken Lay's wife tearfully claimed on the Today show that she and her husband had "lost everything" and "were selling everything they owned." (Of course, reporters swiftly determined that this was not true for their many millions of dollars of properties.) [Pg. 348]
Not the most detailed "factual" survey of Enron (see 'Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron), Watkins' inside information makes this a fascinating read.
April 10, 2025
No Morals,No Ethics - The Deal at ALL Cost
Sadly ,this is the arrogant mentality that they used to justify the deliberate violation of all accounting and market principals.
Phoney financial statements. Over a billion in losses hidden off the balance sheets.
The fall of Arthur Anderson and the disgrace of Merrill Lynch.
While failing , including the last week,senior execs funneled out millions while the regular employees lost their jobs and money in the 401k plans.( changed to Enron stick only so worthless)
Enron is now an old story BUT the attitude and manipulation is a current today
Sadly ,this is the arrogant mentality that they used to justify the deliberate violation of all accounting and market principals.
Phoney financial statements. Over a billion in losses hidden off the balance sheets.
The fall of Arthur Anderson and the disgrace of Merrill Lynch.
While failing , including the last week,senior execs funneled out millions while the regular employees lost their jobs and money in the 401k plans.( changed to Enron stick only so worthless)
Enron is now an old story BUT the attitude and manipulation is a current today
July 11, 2021
This was the fourth book on Enron I read this year. The best book is still the Smartest Guys in the room. Since it was "co-authored" by Sheron Watkins, I thought I would additional insight I didn't know before. Unfortunately, that wasn't the case. The only thing I learned more of was about McMahon. He seems to have a different role in each book. Most of the books portrayed him in a negative light except one book that portrayed as a savior but it was written by an author who seems unhinged.
February 2, 2025
This is Mimi Swartz’s highly detailed look at the collapse of Enron with help from former employee Sherron Watkins. I enjoyed the specificity reference the inner struggles of high level management, but also thought the book to be a tad tangential reference some of the background stories of the players involved and lengthy descriptions of some of the away from Enron activities (cross country skiing, paintball, etc).
February 23, 2017
As the third Enron book I have read, it added little to what I already knew about the company. But if this is your first book on Enron, then it will reveal everything about the Houston based company and its culture. In any case, the book was very pleasurable. It also stayed away from being too technical.
October 3, 2021
An excellent review of the Enron collapse from an insider view.
Understanding the story of Enron is required for any leader in the modern era. They are living the aftermath and if they don't learn what happened, they are likely to repeat the mistakes in a new form just as wrong as the off-balance-sheet vehicles created by Enron.
Understanding the story of Enron is required for any leader in the modern era. They are living the aftermath and if they don't learn what happened, they are likely to repeat the mistakes in a new form just as wrong as the off-balance-sheet vehicles created by Enron.
May 10, 2022
I have finally got some understanding of what the Enron collapse was all about. This book attempts to simplify the systems of manipulating accounts and financial statements and the greed that existed and that ultimately led to bankruptcy. Do I understand all the manipulations? No, the fraud was too complex but I have got the gist of it. What a ride reading this book was, so satisfying to read.
August 23, 2018
Good book. Well-written.
January 13, 2020
Great inside look at how a company could soar so high and then crash down due to a CFO thinking he could game the system in perpetuity.
December 6, 2021
A fascinating look inside Enron and its infamous collapse. As someone that was very young at the time, and is now working for a large corporation and working towards an MBA, I have been extremely interested to hear about this story and this book really scratched that itch. Can be somewhat hard to follow along at times with the explanation of the various vehicles used by Fastow but the book certainly doesn’t shy away from the drama and does a great job creating a visual for the reader.
November 7, 2022
Generally, this book is a fairly high-level review of the Enron saga and feels a little surface and lacking depth compared to a book like The Smartest Guys in the Room. The one area that it excels, likely due to the area of expertise of Sherron Watkins, is digging into the details of the off-balance vehicles at the heart of the Enron scandal. While those vehicles were extremely complex and still hard to understand after listening to this book, I came away with a better understanding of their structure than I did from reading Smartest Guys.
April 1, 2011
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.
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.
January 29, 2017
A good book with a lot of details about the Enron debacle. At first you think that just a few people are the bad guys, cooking the books and keeping the debt off the balance sheet. But as you read you realize how greedy all the people there were, including Sharon Watkins, the supposed whistle blower (who really wasn't, though she did eventually go the the CEO with some of her questions and suggestions...a real whistle blower would have gone to the SEC or other outside agency). As you read along you find many people who are dissatisfied with the way the company is run, and some questioning the accounting being done, and conflicts of interests. But they stay there to collect their high salaries and bonuses. Even Sharon said she wanted to leave but she had a big house with big bills and wanted to have another baby before looking for another job. She was making 100-250K while she was working there, and she couldn't save? Enron just mirrors our society, and how we all are sucked into the materialistic society and its trappings, and don't care who might be on the other side of our money grabbing. In my reading of the books about the scandals of the 80s, 90s, 00s, and this book, it shows the speculating that is prevalent. The government claims we need it for market liquidity, but maybe we need to go to a slower market and slower growth in the economy, and stop these speculators.
November 11, 2013
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 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.
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.
February 4, 2017
I found this a fascinating book but I lived in Houston when the S*** hit the fan and did it ever. The shock waves reverberated through the whole city, taking many down with it.
I admired sherron Watkins before reading this and although I know she had a stake in this book I WANT to believe that her pointing out the issues was not for selfish reasons. She did not want the company to collapse, she wanted the company to come clean. But it wouldn't, and didn't. And houston wept.
I admired sherron Watkins before reading this and although I know she had a stake in this book I WANT to believe that her pointing out the issues was not for selfish reasons. She did not want the company to collapse, she wanted the company to come clean. But it wouldn't, and didn't. And houston wept.
August 18, 2015
A great read with a really good character depiction. However one cannot but wonder whether Mimi didn't twist it some in order to appear better than reality.
January 22, 2013
Fascinating inside look at the Enron culture.
February 17, 2016
Sherron Watkins, heroic whistle-blower
January 13, 2011
I learned so much from this book. Saw corporate dishonesty from the inside. Really enjoyed it.
September 17, 2013
The classic tale of corporate greed. This book gives an insider's view of what went on at Enron.
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